TL;DR
Catastrophic wildfires have fueled an insurance crisis in the western U.S., with over 200,000 California homeowners losing coverage. Insurers want looser regulations to price risk accurately, while advocates warn it enables discrimination. With climate change escalating fire dangers, balancing availability and affordability is complex. Reforms, mitigation partnerships, and zoning changes may expand options. But government backstopping may be needed in the highest-risk areas, as decisions in California will shape national precedents.
The escalating home insurance crisis in wildfire-prone regions of the United States poses grave threats
to affordability, accessibility, and even the viability of home ownership across huge areas of the country.
As recent fire seasons have extended and pushed blazes into new areas unaccustomed to major fires,
the challenge of balancing availability and affordability in insurance markets serving fire zones grows
increasingly complex.
Northern California is at the Epicenter
California like other the western states most vulnerable to destructive wildfires, the crisis has reached a
severe phase. Cities in the San Francisco Bay Area, including Oakland and the surrounding San Francisco
East Bay communities, face especially high risks. These risks became tragically clear during the
devastating 1991 Oakland Hills fire, where loss of life and structures were destroyed in the Oakland-
Berkeley hills.
Going into 2024, nearly one-quarter of Californians, approximately 9 million people, now reside in areas
classified as facing high risk of catastrophic wildfire. This number continues expanding each year as
more individuals and families move into the “wildland/suburban” areas. With bone-dry vegetation and
fierce winds increases the fire risk in California. But the scale and intensity of recent mega-blazes
represent a drastic departure from historical norms.
The Rising Costs of Wildfires
According to data compiled by the California Department of Insurance, insured losses from wildfires in
the state have topped $26 billion since 2017 alone. Nationwide, between 2017-2021, wildfires inflicted
over $60 billion in direct property damage, burning over 13 million total acres. The average wildfire
season now lasts 2-3 months longer compared to the 1980s. In 2021, the United States experienced its
highest number of wildfires ever documented, with over 59,000 blazes incinerating landscapes from
California to Alaska.
Given current trends, there is little reason for optimism that wildfire risks will appreciably diminish in
the coming years. Most models project hotter, drier conditions for much of the American West, meaning
immense fires will remain a fact of life.
Insurance Companies Struggle to Adapt
For insurers, the series of unprecedented, catastrophic fire seasons in recent years has shattered the
previous models they relied on to underwrite policies and set rates. The industry as a whole was caught
flat-footed, incurring massive financial losses that jeopardize the future viability of homeowners
insurance markets across fire-prone regions.
According to data from the California Department of Insurance, insurance companies have declined to
renew over 215,000 homeowner policies in zip codes affected by wildfires since 2015. In zip codes
impacted by the massive fires of 2017 and 2018, policy non-renewals spiked by 61%. With insurers
fleeing California’s market in droves, applications for coverage through the state’s insurer of last resort –
the FAIR Plan – have jumped nearly 200% in some counties.
Those insurers still operating in California have become highly selective regarding which customers and
neighborhoods they will continue to serve in wildfire-prone areas. The denser the population in highly
flammable areas the less the chance of obtaining overage.
To keep their coverage, many affected homeowners are resorting to the FAIR plan or dramatically
increasing their policy deductibles. While this lowers premiums in the near-term, it shifts much greater
financial risk directly onto individuals in the event their house actually burns as well as reducing the
extra coverages afforded by traditional policies.
The Battle Over Insurance Regulations
This insurance crisis stems directly from the worsening mismatch between assumptions embedded in
risk models versus current realities.
Insurers argue outdated California regulations prevent them from adequately pricing risk to align with
modern wildfire dangers. Under Proposition 103, a landmark law passed by voters in 1988, insurance
companies must justify rate increases through a public review process. The regulations prohibit pricing
based on zip code or other demographic factors. Rates instead must derive primarily from historical loss
data over the preceding 20 years. This reliance on backward-looking data hinders insurers’ ability to
price policies based on predictive modeling that forecasts intensifying future wildfire losses.
Insurance companies losing billions due to recent massive wildfires, argue the only way to make insuring
fire-prone regions financially viable is to charge premiums that genuinely reflect heightened risks. From
their perspective, looser regulations would allow actuaries to better tailor pricing to risks projected for
individual homes based on hyper-local factors.
On the other side, consumer advocates want tighter controls over pricing and underwriting practices by
insurers. They worry detailed risk modeling will enable companies to effectively discriminate against
homeowners based on socioeconomic status. Under such a system, only more affluent individuals may
be able to afford the elevated premiums required to live in fire zones. Others predict risk pricing would
create a downward spiral, with insurance availability itself further diminishing home values and tax
bases for communities already struggling from repeated wildfire losses.
New tools like ZestyAI’s Z-FIRE risk model provide insurance companies an ability to generate property-
level wildfire risk assessments. But some caution these algorithms could also facilitate covert
discrimination under the guise of impartial analytics.
California will set the Precedent
The escalating impacts mean there are no perfect solutions to align availability and affordability in
insurance markets serving wildfire country. Failing to make insurance reasonably accessible could make
vast regions of the United States essentially off-limits to all but the most affluent. But forcing insurers to
keep prices artificially low through regulation risks future market collapses that would leave everyone
without options.
As the home insurance crisis in wildfire zones intensifies, a battle is unfolding between insurers lobbying
for scaled-back regulations and consumer advocates fighting to retain tighter controls. The ultimate
solutions arrived at in states like California will set precedents for insurance regimes governing risk
across the United States. With the spread for holistic solutions balancing availability and affordability
rapidly narrowing.
Recommendations
The escalating home insurance crisis in wildfire-prone areas poses a complex challenge with no easy solutions. As climate change increases wildfire risks, insurers are struggling to adapt their risk models and pricing mechanisms.
The escalating home insurance crisis in wildfire-prone areas poses a complex challenge with no easy
solutions. As risks increase, insurers are struggling to adapt their models and pricing.
The key to mitigating risks and protecting your policy is through proactive home hardening and
establishing defensible spaces. Upgrades like fire-resistant roofing, ventilation covers, mesh screening,
and removing flammable vegetation within 30 feet of the home is a positive move to protect your
investment.
Ultimately, balanced regulation and local zoning can help create new housing which does not force
people to move into high-risk areas thus over populating fire zones. A balanced approach is needed that
finds a middle ground between overly rigid regulations and over the top risk pricing. Thoughtful reforms
to regulations combined with partnerships supporting mitigation and smart zoning can help expand
options. But some government back-stopping of risks may prove necessary in the most fire-prone
regions.
The home insurance crisis highlights the deep complexities of adapting our systems and policies to risks.
But working together, government, industry and communities can find innovative solutions to promote
resilience.